The Dow Jones Industrial Average closed down 1.15pc, to 11,855.42, after falling as much as 2pc on opening.

5pm: FTSE 100 fights back from 3pc early loss

The blue-chip index rallied off session lows to close down 1.4pc with investors taking the view that the global sell-off triggered by fears of a nuclear crisis in Japan was overdone.

Having fallen by as much as 3pc in the morning, traders helped the FTSE 100 rally to finish the day down just 79.62 points at 5695.28 as Nikkei futures indicated the Japanese stock market could bounce back from its 10.6pc fall overnight.

"This is an impressive recovery off the sub-5600 lows seen this morning, but still leaves the blue-chip index down by around 70 points," said Will Hedden, a trader at IG Index. The FTSE 250, though, fell by 1.75pc - or 198.32 - to 11,151.23 points.

Mr Hedden added: "Investors don’t appear to be letting this afternoon’s rally disguise the risks that are still very much out there. Although radiation has been reported to be falling at the Fukushima nuclear plant there is uncertainty surrounding just how long Japan’s economic activity will be effectively suspended – and the corresponding effect this could have on global manufacturing and the wider recovery."

Back among the blue-chips, life assurers took a battering in the afternoon despite the fact they are unlikely to be affected by property claims from the Japanese earthquake. Old Mutual lost 3.1pc and Legal & General fell 2.5pc.

IAG Group, owner of British Airways, dropped almost 4pc after Deutsche Bank lowered its price target to 290p.

Miners followed metal prices lowere as the investors worried about the impact of the earthquake and tsunami and the susequent explosions and radiation leaks at a damaged nuclear plant in Japan on the global recovery. Silver miner Fresnillo and Eurasian Natural Resources ended down 4.4pc and 3.5pc respectively.

14:20 US markets slump

US stockmarkets tumbled when they began their first session since the Nikkei fell by 10.6pc overnight

The Dow Jones Industrial Average has slumped 2pc and the S&P 500 Index is down by 2.2pc as US traders reacted to news of a worsening nuclear crisis in Japan.

The FTSE 100, though, is still recovering off session lows. The blue-chip index is down just 2pc, having fallen by as much as 3pc this morning.

Some strategists reckon London traders may have got too carried away in reacting to the overnight slump in Japan by selling stocks across the board.

Jonathan Stubbs, a strategist at Citigroup, reportedly said in a note to clients that "at the equity market level we do not expect the earthquake materially to impact the key drivers to the world economic recovery or investors’ risk appetite".

Meanwhile, Nomura’s Owen Job is reported to have pointed out that some assessments of the economic impact of the earthquake in Japan are at just over $100bn but this would be similar to the cost of Hurricane Katrina to the US. The S&P declined 5pc in response to Katrina, but later rebounded 10pc. The Nikkei is currently down nearly 20pc.

The blue-chip loserboard is still very similar to this morning's line up.

Burberry, which was one of the biggest faller in London yesterday, continued its downward spiral. It fell 4pc as investors remained worried about the prospect of sales recovering quickly in the valuable Japan market.

Miners also fell as the investors worried about the impact of the earthquake and tsunami and the susequent explosions and radiation leaks at a damaged nuclear plant in Japan on the global recovery. Eurasian Natural Resources, Kazakhmys, Antofagasta, and Fresnillo were down between 6pc and 4pc.

With the oil price slipping back to $110 a barrel on fears of a slowdown in global demand following the earthquake, BP was a drag on the index. The shares slid 3.6pc. Elsewhere in the sector, Heritage Oil was the biggest loser on the FTSE 250 index, tumbling 14pc. Shares in the group have been risen in recent days on speculation of a bid from Austria's OMV. However, the gossip is thought to be wide of the mark. Citigroup took up coverage of the company with a "hold" rating, which may have dissapointed some dealers.

Shares in ARM Holdings slipped 3pc as the designer of chips suffers from disruption to production as a result of the massive quake in Japan. Spot prices of NAND-type flash memory chips used in mobile devices rose nearly 3pc after plant shutdowns in Japan caused supply problems.

Next is the only blue-chip riser, gaining 1.3pc.

11:30 Blue-chip index rises off session lows

The FTSE 100 has risen off session lows as some analysts question whether the London market has overeacted to the disaster in Japan.

The blue-chip index is now down just 2pc - or 116 points - to 5658.7. Some strategists reckon London traders may have got too carried away in reacting to the overnight slump in Japan by selling stocks across the board.

Jonathan Stubbs, a strategist at Citigroup, reportedly said in a note to clients that "at the equity market level we do not expect the earthquake materially to impact the key drivers to the world economic recovery or investors’ risk appetite".

Meanwhile, Nomura’s Owen Job is reported to have pointed out that some assessments of the economic impact of the earthquake in Japan are at just over $100bn but this would be similar to the cost of Hurricane Katrina to the US. The S&P declined 5pc in response to Katrina, but later rebounded 10pc. The Nikkei is currently down nearly 20pc.

Scottish and Southern Energy has climbed back on to the leaderboard alongside Next, which is up about 2pc.

The loserboard was very similar to this morning's line up.

Burberry, which was one of the biggest faller in London yesterday, continued its downward spiral. It fell 4pc as investors remained worried about the prospect of sales recovering quickly in the valuable Japan market.

Miners also fell as the investors worried about the impact of the earthquake and tsunami and the susequent explosions and radiation leaks at a damaged nuclear plant in Japan on the global recovery. Eurasian Natural Resources, Kazakhmys, Antofagasta, and Fresnillo were down between 6pc and 4pc.

With the oil price slipping back to $110 a barrel on fears of a slowdown in global demand following the earthquake, BP was a drag on the index. The shares slid 3.6pc. Elsewhere in the sector, Heritage Oil was the biggest loser on the FTSE 250 index, tumbling 14pc. Shares in the group have been risen in recent days on speculation of a bid from Austria's OMV. However, the gossip is thought to be wide of the mark. Citigroup took up coverage of the company with a "hold" rating, which may have dissapointed some dealers.

Shares in ARM Holdings slipped 3pc as the designer of chips suffers from disruption to production as a result of the massive quake in Japan. Spot prices of NAND-type flash memory chips used in mobile devices rose nearly 3pc after plant shutdowns in Japan caused supply problems.

9:30 The blue-chip index slumps on fresh Japan fears

London shares fell sharply on Tuesday as investors in Europe joined a global market sell-off that started with a 10.55pc plunge in the Nikkei as panicked investors dumped stocks in the face of an escalating nuclear crisis in Japan.

The FTSE 100, which opened down around 1.2pc, took fright and by 9.29am has tumbled 3pc - or 169 points - to a fresh year low of 5606. Germany's DAX dropped 3.6pc and France's CAC 2.8pc to join spooked Asian markets.

Burberry, which was one of the biggest faller in London yesterday, continued its downward spiral. It fell 7pc as investors remained worried about the prospect of sales recovering quickly in the valuable Japan market.

Miners also fell as the investors worried about the impact of the earthquake and tsunami and the susequent explosions and radiation leaks at a damaged nuclear plant in Japan on the global recovery. Eurasian Natural Resources, Kazakhmys, Antofagasta, and Fresnillo were down between 6.8pc and 6pc.

Retailers Next and Marks & Spencer, and power companies Scottish and Southern Energy and International Power were the only risers in the FTSE 100 at 8.34am. By 9.28am Next was the only riser.

"The situation is very fluid and changing from hour to hour," said Keith Bowman, equity analyst at Hargreaves Lansdown.

"The Japanese funds have a considerable amount of foreign debt and there are concerns that the events may cause them to sell some of their debts and repatriate the funds back home."

Shares in ARM Holdings slipped 4.5pc as the designer of chips suffers from disruption to production as a result of the massive quake in Japan. Spot prices of NAND-type flash memory chips used in mobile devices rose nearly 3pc after plant shutdowns in Japan caused supply problems.

London-listed uranium explorers Berkeley Resources, Forte Energy, Kalahari Minerals and fell up to 30pc on concerns over the future of the global nuclear power build programme amid fears of a major radiation leak from the nuclear complex in Fukushima following Japan's massive earthquake.

Sterling fell against a broadly stronger dollar as investors headed for the perceived safety of the US currency. The pound fell around 0.7pc on the day to $1.6051, with traders citing selling by macro-related funds, which often use algorithmic trading structures.

"It looks like a risk-off day today," said a trader. "I have a gut feeling we will see $1.60 again".

Sterling rallied earlier this year on rising speculation the Bank of England may raise interest rates by mid-year, but its upward momentum has lost steam as a run of weak UK economic data prompted investors to pare back bets on a hike by June.

Brent crude was trading down $1.28 at $112.40 in London.

The US Federal Reserve delivers its rate decision later today, with expectations that it will hold monetary policy on a steady course. It is also likely to comment on Japan.

06.30 Japan stocks plunge on nuclear crisis fears

Tokyo shares closed down 10.55pc on Tuesday as panicking investors dumped stocks after the government said levels of radiation leaking from a stricken nuclear plant posed a threat to health.

Japan's Nikkei index clawed back some ground from an earlier freefall - sliding more than 12pc at one stage - to close down 1,015.34 points at 8,605.15. The broader Topix index fell 9.47pc, or 80.23 points, to 766.73.

The broader Topix plunged 9.5pc in its worst two-day plunge since 1987.

Other Asian markets suffering a ripple effect as investors fled stocks as the crisis in the world's No. 3 economy seemed only to escalate.

Car makers declined partly because quake-stricken northeastern Japan is a major center for auto production, complete with a myriad of parts suppliers and a network of roads and ports for efficient distribution.

Major vehicle manufactures halted production after the quake, and their shares continued to slide. Toyota, the world's largest automaker, fell 11pc. Honda lost 7.4pc and Nissan dropped 10.2pc. Mitsubishi Motors lost 14.4pc and truck-maker Isuzu plunged 8.6pc.

Fears about the safety of nuclear power weighed on the shares of companies involved in uranium mining. Energy Resources of Australia, one of the world's largest uranium producers, fell 13.2pc in Sydney.

Even the rare stocks that did well on Monday — industrial and materials companies, which gained due to expectations that they would benefit when Japan rebuilds — tumbled.

Brent crude, which had edged higher on Monday on continued Middle East tension, fell $2 to $111.61 in Far East trading as traders worried about the loss of demand from Japan.

Attempts by the Bank of Japan to inject more liquidity into the banks and the extension of its asset purchase scheme failed to calm nerves.

On New York on Monday, the Dow Jones Industrial Average recovered slightly from early sell-offs but still ended the day down 51.24 points - 0.43pc - at 11993.16. The leading index of US stocks fell to a six-week low at one point as investors worried about the effects of Japan's disaster.